The financial and economic crisis: the European Union affected by the US ‘example’

Karl MarxThe following is from the website of the Workers Party of Belgium:

The financial and economic crisis: the European Union affected by the US ‘example’

Bert De Belder, Institute for Marxist Studies (IMAST), Belgium

Paper presented at the 15th International Conference on European Studies
Center for European Studies (CES), Havana, Cuba, 25-28 November 2008

I. The ‘financial’ crisis : a Marxist analysis

September 2008 will probably continue to resonate for years and decades to come, just as September 2001 did, with 9/11. But with quite differente consequences. After the attack on the Twin Towers, the US went to war. After the crisis on Wall Street, the mighty superpower lies down on the canvass. An article in Der Spiegel headlined: “The End of Arrogance – America Loses Its Dominant Economic Role”.1 Several US financial institutions have gone bankrupt, while others could only be saved by capital injections to the tune of billions of dollars of public money.

The crisis is not just a US affair, it has engulfed the majority of countries that followed similar economic and financial policies as Washington’s. Throughout the world, more than 1000 billion dollar in junk bonds disappeared, marketing between banks was temporarily stopped, and among the public, a generalized distrust – not to say panic – set in. What seemed to start as a merely financial phenomenon very soon reached the real economy. A general recession has set in, in the US, in the Euro zone and in Japan.

The current crisis demonstrates the total impasse of the capitalist system. Karl Marx demonstrated why and how capitalism inevitably leads to crises of overproduction. At the core of the capitalist economy, there is a fundamental contradiction between the private ownership of the means of production, and the ever more social character of production. The drive for ever higher profits pushes every capitalist to increase production, creating additional capacity over and over again. But the cut-throat competition between capitalists forces them to produce cheaper, either through a constant downward pressure on the wages, or through increasing productivity, in both cases intensifying the exploitation of the workers.

An insoluble contradiction between the growing production capacity and the diminishing purchasing power of the masses is its result. Marx explains that every crisis is essentially a crisis of overproduction: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”2 The ultimate cause of the deepening of the systemic crisis of capitalism is to be found in the tendency of the rate of profit to fall.

A long drawn-out and ‘postponed’ crisis of overproduction

The capitalist system has proven to be resilient and creative in searching for ‘solutions’ to the crises of its own making, with the help of the bourgeois State. According to the classical recipe, a crisis is followed by a period of destruction of productive capacity, closures and rationalisation. Prices are lowered, the price of labor power (the salary) is also depressed. The weakest competitors disappear or are absorbed by the stronger ones. This way, the productive capacity adapts itself to the demand, the profit rate increases again, there are new investments and a new cycle can begin. Marx described this process of growth, stagnation, crisis and recovery over a short period of 5 to 7 years, as a conjunctural cycle.

But since 1973, the world capitalist system is in a structural crisis, a crisis of overproduction (or of over-capacity, which is a situation of relative over-production). A high unemployment rate deprives hundreds of millions of workers of a decent income. In order to stay ‘competitive’ and increase the profit rate, the bourgeois governments in capitalist countries attacked and undermined labor laws, dismantled and privatized the public sector and deregulated the financial system. Another characteristic of a crisis of overproduction is an excess of capital, that cannot be invested in the expansion of production, the latter being confronted with the limitation of the market. The excess capital goes searching for a high return. As the profit rate in production has fallen, the financial sector seems to offer a solution.

That way begins an ever more intense interrelation between companies and the stockmarket, leading to a situation in which the profits for the shareholders have become the first criterion for a company’s action. The tone was set by General Electric’s CEO Jack Welch in 1981. In order to make his company the best buy for shareholders, he dismissed 10% of his workforce, and started to buy up stocks in financial holdings, bringing in extra profits. This strategy is quite successful and become the norm in the entire capitalist world. The profit margin for the shareholder is fixed beforehand at some 15%, which is much higher that the average profit margin. This incites companies to permanently rationalize and take financial risks. US companies set the standard for competitive companies, their methods of financial management are copied the world over, and also European and Japanese monopolies start getting more profits from their financial operations than from industrial production.

This brings about an enormous growth of financial products, that become themselves the object of speculation, to an extent that the classical relation between banks and industry takes on rather new forms. Companies are bought up by hedge funds or private equity funds, financed by junk bonds at high risk.

Which brings us to the definition of finance capital by Lenin: “It is characteristic of capitalism in general that the ownership of capital is separated from the application of capital to production, that money capital is separated from industrial or productive capital, and that the rentier who lives entirely on income obtained from money capital, is separated from the entrepreneur and from all who are directly concerned in the management of capital. Imperialism, or the domination of finance capital, is that highest stage of capitalism in which this separation reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially “powerful” states stand out among all the rest.”3

The ‘virtual’ capital created in the financial sector of the economy is entirely based on the expectation of endless growth, and creates speculative ‘bubbles’ that provide for extra consumption able to temporarily absorb overproduction, but that have to collapse sooner or later. This first happened with the Third World debt crisis, starting with Mexico’s default on debt payments in 1982. The same occurred with the financial crisis on the Asian markets in 1997, followed by serious financial crises in Russia and Brazil. The speculative funds then directed themselves to the ICT (Information and Communication Technology) companies of Silicon Valley, but then in 2000 also this bubble burst with the crash of the Nasdaq. That’s where the story of the next financial bubble, that of the subprimes (mortgage loans with high risks), started. After 11 September 2001 the Federal Reserve diminished its prime rate to 1% in order to avoid a recession. Mortgage companies used this to aggressively offer cheap housing loans at very favorable conditions. The next bubble was born, and was programmed to burst.

These mechanisms – the indebtedness of the Third World, financial speculation, the ICT boom and the housing loans – provided temporary and partial ways out of the crisis of overproduction that started way back in the early 1970s. In this sense, we may speak of a long drawn-out and ‘postponed’ crisis of overproduction.

The boom of finance capital, and the bust caused by speculation

Speculation has become characteristic of finance capitalism. Commenting on today’s financial crisis, a professor at the Catholic University of Louvain (UCL), Christian Amsperger, noted: “Let us put an end to the hypocrisy and admit once and for all that the stockmarket speculation that brought our banks to the brink of the abyss, is capitalism’s very reason for being. It is undecent to combat speculation while pretending that finance capitalism (and capitalism as a whole) would be able to survive in any way without speculation.”4

Indeed, the US economy (but also, to a lesser extent, the EU economies that followed this trend) had been propelled by enormous speculation on the financial markets. Between 1982 and 2002, the level of US production increased 2.5 times, while that of the financial markets increased tenfold. Financial markets became overheated, with 1,100 billion dollars of foreign currency changing hands every day. This ‘virtual’ capital gave the illusion of a solution to the economic crisis by momentarily providing easy money, but it inevitably prepared the bursting of the financial bubble. The exaggerated growth of the financial, speculative sector did not correspond to the reality of production.

Economic depression has always been preceded by a financial and stock market collapse, giving the false impression that the nature of the crisis is financial. But its real cause is to be found in the productive system. It is rooted in the private ownership of the means of production, in the contradiction between the social character of production and the private appropriation of the social product. Thus a new and more devastating crisis was inevitable, as was already stated at the International Communist Seminar in Brussels, in 2002: “Conditions are building up for a crisis to break out, more serious and more destructive than that of 1929.”5

II. How the financial and economic crisis hit Belgium

In the center of the EU, Belgian’s major banks had to be saved by the Belgian State, for they were at the brink of bankruptcy. Fortis (a private holding with banking and assurance activities, which used to be in part a public bank until the late 1980s) was first half, then fully nationalized by the Belgian State after a few nightly meetings at the highest level, only to be immediately resold to the private sector, the French group BNP-Paribas at a bargain price (14.5 billion dollar, while the group’s profit over the past four years alone amounted to 27 billion dollar). A similar scenario happened with Dexia (another privatized bank that used to be public before, providing credit to municipalities and linked to the workers movement): the profitable parts were sold out, while the less interesting and risky components were covered by a State guarantees. This boils down to socializing the debts, and privatizing the profits. The government also decided that the State – meaning to say, the Belgian taxpayers – will also guarantee loans between banks, as well as the savings of the banks’ clients.

All in all, the Belgian State put 20.4 billion dollar in the buyout and strengthening of four banks (Fortis, Dexia, KBC and Ethias). So who wins, and who loses in this unprecedented operation?

  • Although the people have their small savings guaranteed, they stand to lose, for the Belgian State has had to contract loans for the 20.4 billion dollar it put into the banks, and will have to pay interest on these loans – to be paid by the taxpayer.
  • Small stockholders of the banks – and in European capitalist countries, a large proportion of the workers, especially bank employees, had been enticed to become one – see their shares plummet in the stockmarket and their savings disappear. Whoever has invested in private pension funds, will see his pension savings vanish.
  • Thousands of bank employees will face unemployment following drastic restructuring plans.
  • In the meantime, CEOs and other top cadres get away with a golden handshake of millions of euros.
  • And finally, the major European banking groups, like PNB Paribas, are able to buy the best pieces of the Belgian banks at a bargain price, thus increasing the concentration of capital.

The crisis has also started to hit the real economy, with mass layoffs in several industrial and service sectors, and technical unemployment of weeks on end in the steel and car industry. In the sole province of Hainaut, 20,000 workers will be technically unemployed for at least one or two weeks in the remainder of 2008. For the whole of this year, workers at Volvo Cars will be 30 days technically unemployed, while another 250 workers will be dismissed. At Volvo Trucks as well, 400 young workers will lose their job. General Motors in Antwerp has deleted its night shift and closed shop the last two weeks of October for lack of orders. In the textile sector, 2000 jobs already got lost.

III. The European Union and the Lisbon strategy: in the footsteps of the US

A general characteristic of the European plans is that the US serves at their model. This is no coincidence. From the beginning of the crisis in the early 1970s, the US superpower has weighed heavily on the world economy, and even more so since 1980, when the most reactionary and aggressive faction of the US bourgeoisie came to power with Reagan. For more than sixty years, the biggest US capitalists have ruled the world economy in their interests. And the ‘remedies’ the US adapted to stave off the crisis of overproduction have heavily influenced economic and financial policies in the European Union.

Since the mid-1990s, and under the guise of competitivity, European corporations – through the European Round Table of Industrialists – began to demand a yet higher productivity and flexibility of the workers, lower corporate taxes, more cuts in the social security system and in the salary cost of the workers, policies that were already in place in the US. Their demands would lead to the Lisbon Agenda, adopted in 2000 and aiming at making Europe “the most competitive and dynamic knowledge economy in the world” by 2010, thus wanting to overtake the United States.

In many fields, the EU and its member states indeed began copying US policies: tax reforms to the benefit of the big companies, privatizing social security, the total deregulation of the market, the excessive development of the stock market, diminishing social benefits for the workers and so on. Since the early 1990s, the EU is implementing the liberalisation of telecommunications, railways and the postal services. The formerly public services are becoming new fields for profit for private capital. The reversal of socialism in the former Soviet Union and the Eastern European countries only added to the aggressiveness of capital, with more privatisation, liberalisation and deregulation.

In order for the European companies to compete with their US counterparts, the exploitation of the European workers has to become more intense and comprehensive, adding to the capitalists’ arsenal new concepts such as “flexicurity” (supposed job security in exchange for working extremely flexible hours), “employability” (the disponibility of workers for the labor market at any time) and the “activation” (forced integration in the labour market) of the jobless, elderly and even handicapped people. This kind of competition with the US is nothing but a rat race to the bottom as regards social rights and welfare.

IV. The crisis as an opportunity: the struggle for reforms and the perspective of socialism

The US, the Euro zone countries and Japan are in recession, and indications are that the economic crisis is not to go away in the years to come. Economic activity is expected to fall by 0.9 percent in the US next year, by 0.5 percent in the Euro area and by 0.1 percent in Japan, as all OECD countries enter a protracted slowdown.

US – and European – capital seems to have exhausted all means to further ‘postpone’ the crisis of overproduction: it is hard to imagine where and how a new round of yet more indebtedness, more risky credits and loans, more financial speculation or new financial markets would appear on the horizon. For this crisis of overproduction, no other solution remains than the classical one: the massive destruction of means of production, through closures, mass lay-offs, ever increasing cut-throat competition, conflict and war.

Meanwhile, the impoverishment of the workers and the toiling masses is increasing. According to a recent OECD study6, the gap between rich and poor has still expanded over the past 20 years. Not just in the US (where one in six people is poor, and the richest 10% possess 71% of the country’s wealth), but also in Europe. In Germany, one in nine people is poor; in Belgium, one in eleven. In 19 of the 24 OECD countries the gap between rich and poor has grown.

As we explained, the current crisis is not at all a crisis of a supposed “casino capitalism”, and cannot be solved with merely more or a better regulation of the current system, although that is precisely what the bourgeoisie and their political expressions pretend. It is interesting to see that in their reactions to the current crisis, almost no differences exist between the proposals of the most reactionary and the Social Democrat factions of the bourgeoisie. As an illustration, try to spot the difference between the following quotes:

“We do not oppose free competition, as long as it takes place in a regulated, orderly market. Regulation needs to be done at a Belgian and a European level.”

“We favour a better regulation. The rules at the European level have to be changed and controls have to be strengthened.”

The former is from the president of the Flemish Social Democrats (sp.a), Caroline Gennez, the latter from the president of the Association of Belgian Companies (VBO), Rudy Thomaes.

The following remark by Frederick Engels entirely applies to the Social Democrats’ reaction to the crisis: “Our bourgeois socialist takes us from the economic sphere into the moral sphere. And nothing is more natural. Whoever declares that the capitalist mode of production, the “iron laws” of present-day bourgeois society, are inviolable, and yet at the same time would like to abolish their unpleasant but necessary consequences, has no other resource but to deliver moral sermons to the capitalists, moral sermons whose emotional effects immediately evaporate under the influence of private interests and, if necessary, of competition.”7

But this is hardly surprising for whoever remembers that at the time of the signing of the Maastricht Treaty of the European Union, in 1992. 11 out of the 15 Prime Ministers of the then EU Member States were Social-Democrats. This Treaty contained the infamous Maastricht norms, entailing harsh budgetary restrictions and many-faceted attacks on workers rights and public services. Social Democrats have been at the forefront in imposing the privatisation of the public sector, in Belgium as in many other European countries.

What then, can the workers, their trade unions and their genuine parties do in the face of the current financial and economic crisis? In the economic sector, they have to fight for workers’ jobs and rights, as always. In the financial sector, they can launch a campaign, together with allies in democratic and progressive circles, for one centralized State bank that is genuinely in the interest of the workers. A bank that puts the savings of the workers above the big dealings with capitalists. A bank that is under workers’ control. A bank with a social goal, lending money for projects with a social relevance.

Such a bank would never be able to compete with private banks, unless it is actively supported and subsidized by the State. And this would contravene the rules of the European Union. Thus the need to campaign for the abolition of any article of the Treaty of the European Union (the Lisbon Treaty) that prohibits subsidies to public sector companies.

Finally, this systemic crisis of capitalism offers a golden opportunity to promote and advance with more strength and conviction the alternative of a socialist society. Only socialism can, once and for all, do away with the major contradictions of capitalism, leading the latter from crisis to crisis, at the expense of the workers and the peoples of the world. Let the workers strengthen their communist and workers’ parties, intensify the combativeness of their trade unions, build the necessary alliances and prepare for the battles to come, so that the XXIst century will not become a ‘New (North-)American Century’ nor yet another capitalist century, but the century of socialism.

1 “THE END OF ARROGANCE – America Loses Its Dominant Economic Role”, Beat Balzli, Klaus Brinkbäumer, Frank Hornig, Hans Hoyng, Armin Mahler, Alexander Neubacher, Wolfgang Reuter, Christoph Pauly, Michael Sauga, Spiegel, 30/09/2008, http://www.spiegel.de/international/world/0,1518,581502,00.html 

2 Karl Marx, Capital, Volume III , Section 5

3 http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch03.htm

4 Le Soir, 3 October 2008, cited in Solidaire, 9 October 2008

5 http://www.icsbrussels.org/ICS/2002/ics2002_gen_en.htm

6 http://www.oecd.org/document/25/0,3343,en_2649_34487_41530009_1_1_1_1,00.html

7 http://www.marxists.org/archive/marx/works/1872/housing-question/ch02.htm

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One response to “The financial and economic crisis: the European Union affected by the US ‘example’

  1. Already some quick first remarks on that “marxist analyse”.

    The strategy that the communist cadre Bert De Belder offers:

    “What then, can the workers, their trade unions and their genuine parties do in the face of the current financial and economic crisis? In the economic sector, they have to fight for workers’ jobs and rights, as always. In the financial sector, they can launch a campaign, together with allies in democratic and progressive circles, for one centralized State bank that is genuinely in the interest of the workers. A bank that puts the savings of the workers above the big dealings with capitalists. A bank that is under workers’ control. A bank with a social goal, lending money for projects with a social relevance.
    Such a bank would never be able to compete with private banks, unless it is actively supported and subsidized by the State. And this would contravene the rules of the European Union. Thus the need to campaign for the abolition of any article of the Treaty of the European Union (the Lisbon Treaty) that prohibits subsidies to public sector companies.”

    About what workers is Bert speaking? He is speaking of the workers living and working in Belgium. And what for a strategy Bert, being a cadre of a communist party, he gives to the Belgium workers?

    “In the economic sector, they have to fight for workers’ jobs and rights, as always. In the financial sector, they can launch a campaign, together with allies in democratic and progressive circles, for one centralized State bank that is genuinely in the interest of the workers.”

    And the perspective of socialist revolution? Has (only the Belgian?) workers to organise themselves in a mass organisation that once has to undertake that revolution (the revolution will be the work of the mass of the workers),
    So the Belgian workers had also to “do a campaign” for the abolition of one of the instruments of the European Union. Why give Bert not the perspective for a European organisation of the struggle of the (European) workers? Because than you have to speak about the need of the building of an EUROPEAN communist party! And that is a bridge to far for the WPB who is organising itself in function of al kinds of ELECTIONS that take place in Belgium. The goal is; to have cadres ELECTED in parliaments, city councils etc…
    There exist a Centralised State bank: that is the European Bank, because their is one interior market, one kind of money (the Euro). How can you make of that instrument of the capitalist state European Union ““one centralized State bank that is genuinely in the interest of the workers”? A centralised BELGIUM bank: how will it “puts the savings of the workers above the big dealings with capitalists”? As Belgium has to follow the instructions of the European Union?

    “One centralized State bank that is genuinely in the interest of the workers. A bank that puts the savings of the workers above the big dealings with capitalists. A bank that is under workers’ control. A bank with a social goal, lending money for projects with a social relevance.”

    How is it possible that a MEMBERstate of the European Union will organise such a bank?
    Such a bank, Bert say, can only be exist “when it is under workers control’ How can in another way that “workers control” exist than only “under proletarian dictatorshipt” so a SOCIALIST state where the capitalist state is overthrown!
    Bert is a reformist giving the workers the perspective of a possibility to reform capitalism.
    And as a real reformist (as Emile Vandevelde of the Belgian Workers Party the social democratic party founded in Belgium in 1885) his is talking about “socialism” in a very general way:

    “Finally, this systemic crisis of capitalism offers a golden opportunity to promote and advance with more strength and conviction the alternative of a socialist society. Only socialism can, once and for all, do away with the major contradictions of capitalism, leading the latter from crisis to crisis, at the expense of the workers and the peoples of the world. Let the workers strengthen their communist and workers’ parties, intensify the combativeness of their trade unions, build the necessary alliances and prepare for the battles to come, so that the XXIst century will not become a ‘New (North-)American Century’ nor yet another capitalist century, but the century of socialism.”

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